FOREX MARKETS

Know Them, Profit From Them

Make The Trend Your Friend In Forex
by Kenneth Agostino and Brian Dolan

So you didn't see that last headline-grabbing market move coming? Here are some techniques you can use to make sure you'll be prepared next time.

Of the many market sayings that traders throw around, none may be more overused and less understood than the adage "The trend is your friend." All too often, the phrase is used after a trader has taken a countertrend position and subsequently been stopped out at a loss. At this point, remorse sets in, and most traders kick themselves not only for having lost on a countertrend trade but also for not having caught the latest move in the trend itself.

To avoid this all-too-common scenario, let us suggest using several technical tools to identify whether a trend is in place, and then additional indicators to help maximize trading profits. Having a strategy in place to identify trends is essential to successful trading in any market, but especially so in the case of the foreign exchange (forex) markets. Currencies have a greater tendency to move in trends due to the longer-term macroeconomic elements that drive exchange rates, such as interest rate cycles or global trade imbalances. Currencies are also predisposed to short-term, intraday trends due to international capital flows reacting to day-to-day economic and political news.

IDENTIFYING THE TREND

In its most basic sense, a trend is simply a prolonged market movement in one general direction, either up or down. From a trader's perspective, though, that simple definition is so broad as to be almost meaningless. For our purposes, a trend should be defined as a predictable price response at levels of support/resistance that change over time. For example, in an uptrend the defining feature is that prices rebound when they near support levels, ultimately establishing new highs. In a downtrend, the opposite is true: Price increases will reverse as they near resistance levels, and new lows will be reached. Trendline analysis should establish support and resistance levels.

  ...Continued in the September issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the September 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.


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